Eide UK Ltd & Anor v Lowndes Lambert Group Ltd & Anor [1997] EWCA Civ 3005 (16th December, 1997)

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EIDE UK LTD and Another v. LOWNDES LAMBERT GROUP LTD and Another [1997] EWCA Civ 3005 (16th December, 1997)

This appeal raises important questions as to the nature and extent of the lien granted to an insurance broker by Section 53(2) of the Marine Insurance Act 1906. The questions were posed to Toulson J. under O.14A RSC on the basis of agreed facts. Those facts can be summarised as follows.

The Defendants are Lloyd's Brokers who in March 1993 took over the business of Jeffreys Coates and Associates Ltd, who were also Lloyd's Brokers. There is no need to differentiate between them, and I shall refer to "the Brokers" to describe whichever set of Brokers happened to be acting in that role at the time.

Colne Standby Limited ("Colne Standby") were the operators of a fleet of vessels. In July 1992, on instructions from Colne Standby, the Brokers procured two hull and machinery policies, one with Lloyd's and one with members of the Institute of London Underwriters ("the Policies"), for a period of 12 months. The Policies described the insured as:

Colne Standby Ltd and/or Subsidiary and/or Associated companies and/or where required by contract all other companies and/or persons concerned in contracts attaching to this insurance, shall be deemed to be jointly and/or additionally insured for their respective rights and interests.

During the Charter period the Vessel shall be kept insured by the Charters at their expense against marine, war and Protection and Indemnity risks... Such marine, war and P. and I. insurances shall be arranged by the charterers to protect the interests of both the Owners and the Charterers and mortgagees (if any).... All insurances shall be in the joint names of the Owners and the Charterers as their interests may appear.... The Charterers shall, subject to the approval of the Owners and the Underwriters, effect all insured repairs as well as insured charges, expenses and liabilities (reimbursement to be secured by the Charterers from the Underwriters) to the extent of coverage under the insurances herein provided for.

On the 4th June the "SUN TENDER" sustained damage to her starboard main engine and was redelivered by Colne Standby to the Owners in her damaged condition on or about 12th June 1993. Before redelivery of the "SUN TENDER" and termination of the charterparty, Colne Standby incurred disbursements of £19,871.07 in respect of "part permanent repairs". Following the Vessel's redelivery, the Owners arranged for the further repairs to be carried out. Such repairs were paid for by the Owners from the proceeds of a loan from the Bank. The total cost of these repairs was £303,560.07.

Claims under the Policies were made by Colne Standby and by the Bank, as assignee of the Owners and as an assured under the Policies, for their respective losses in September and October 1994. The Brokers collected from the underwriters the sum of £300,931 by way of claims proceeds, acting pursuant to letters of authorisation signed on behalf of Colne Standby and the Bank. The sum paid by the underwriters represented the Owners' repair costs of £303,560 and Colne Standby's repair costs of £19,871, totalling £323,431, less a deductible of £22,000. The Brokers were entitled to deduct a 1% collecting commission, leaving a balance of £297,921. The Bank's share of this sum was £279,629.42.

At the time that these proceeds were received there was owing from Colne Standby to the Brokers a balance of £728,109.82 on an insurance account. This sum was wholly made up of debts in relation to insurances other than the Policies and all of these debts accrued after the issue of the cover note on the 16th June.

(1) Unless otherwise agreed, where a marine policy is effected on behalf of the assured by a broker, the broker is directly responsible to the insurer for the premium, and the insurer is directly responsible to the assured for the amount which may be payable in respect of losses, or in respect of returnable premium.

(2) Unless otherwise agreed, the broker has, as against the assured, a lien upon the policy for the amount of the premium and his charges in respect of effecting the policy; and, where he has dealt with the person who employs him as a principal, he has also a lien on the policy in respect of any balance on any insurance account which may be due to him from such person, unless when the debt was incurred he had reason to believe that such person was only an agent.

The Judge held that the lien granted by Section 53(2) was a lien on the policy itself and no more. Any right enjoyed by a Broker to use claims proceeds collected under the policy to discharge the liability of an assured, or an agent acting for an assured, arose by virtue of general principles of set-off and not under the Statute. Finally the Judge held that Section 53(2) did not, in any event, permit a Broker to assert a lien against one co-assured in respect of the liability of another co-assured.

The Judge held that the appropriate approach was to give effect to what he considered to be the clear meaning of the sub-section without consideration of case law on the subject before 1906, referring to the well known statement of Lord Herschell in Bank of England v.Vagliano Brothers [1891] AC 107, as cited by Roskill L.J. in the context of the 1906 Act in "The Eurysthenes" [1977] QB 49 at p.75. While I agree that the starting point must be to consider the natural meaning of the language used in the sub-section I believe that one must consider the existing case law when considering its effect, for the following reasons. As Mr Gilman, Q.C., for the Bank pointed out, the 1906 Act does not purport to be a comprehensive code, but expressly preserves, by Section 91(2) the rules of common law, including the law merchant, insofar as consistent with the Act. Furthermore, Section 87(1) recognises that usage may vary what would otherwise be an implication of law and, as Arnould 16th Ed. points out at paragraph 162, the rules contained in Section 53 are derived from mercantile usage.

As I shall demonstrate shortly, a number of authorities indicate that a Broker who has a lien over the policy has a commensurate right to retain claims proceeds collected under the policy insofar as necessary to satisfy the debt secured by the lien. In these circumstances it may be that it is a pointless exercise in semantics to argue about whether any right in relation to the proceeds is implicitly conferred by Section 53(2), or whether it arises as a result of some independent rule of law based on mercantile usage when a lien exists under Section 53(2). Having said that, I do not find it acceptable to suppose that the draftsman of the 1906 Act intended, by the simple phrase "lien on the policy" to do more than describe an equally simple and well established type of security, namely the right to retain possession of physical property until a debt has been discharged. True it is that the word "lien", which is used to describe this right which exists in law, is also used to describe other types of security interest which do not necessarily depend upon possession and which can be exercised over a chose in action. It does not seem to me, however, that the phrase "lien on the policy" can properly be treated as shorthand to embrace both a physical possessory lien on a policy and a right to annexe or set-off the proceeds collected under the policy in discharge of a debt owed to the holder of the policy.

Mr Gilman suggested that such a conclusion would be fatal to the Brokers, in that they had, when agreeing to the issues under O.14A, limited those issues to the effect of Section 53(2) of the 1906 Act and further agreed that the result of the action should turn on the O.14A proceedings. I do not agree. If, on whatever legal basis, the enjoyment of a possessory lien on a policy places the broker in a position to look to the proceeds recovered under the policy in order to discharge a debt owed to him, the Brokers in the present case ought, if they had the general lien which they assert, to be entitled to have recognised their right to set-off the proceeds recovered against Colne Standby's debt. I propose, then, to consider first the efficacy of the possessory lien over the policy itself, then the nature of the right that the Broker enjoys in relation to the claims proceeds under the policy and, finally, the question of whether, or to what extent, these rights apply in a case, such as the present, of composite insurance.

A possessory lien over the policy plainly has little value if the assured is able to recover directly from the Underwriter without production of the policy. Before 1906 I do not believe that this would have been considered possible - hence a number of cases where the assured brought suit in trover against the Broker to recover the policy. The position was covered in the 1906 Act by Section 22, which provides:

The significance of this provision lay in other provisions of the Act which required the policy to be stamped - provisions repealed by the Finance Act 1959. These replaced earlier statutory provisions to like effect, see Ionides v. Pacific Fire and Marine Ins. Co. (1871) LR 6 QB 674 at 684-5. The Court would normally be expected to insist upon the production of a policy where a claim was made under it. Quite apart from this it was generally considered that the Underwriter could not be required to pay under a policy unless the policy was produced. Thus, in 1906, the possessory lien appeared a highly effective security, for it prevented the assured from recovering under a policy until a lien secured by the policy was discharged. However, in Swan v. Maritime Insurance Co. [1907] 1 KB 116, Channel J. dismissed a defence plea that Underwriters were not liable because the plaintiff, an assignee, was unable to produce the policy. This decision, coupled with the subsequent abolition of the stamping requirement, has had the effect of reducing the value of the possessory lien on the policy, although production of the policy is sometimes a contractual condition precedent to Underwriters' liability.

858 Lord Tenterden upheld a subpoena requiring a broker to produce a policy but made it plain that the Court would not permit the plaintiffs to recover payment under the policy without discharging the broker's lien. Arnould, paragraph 200, suggests that where an assured attempts to defeat a broker's lien by suing without production of the policy, the appropriate course is for the broker to intervene under O.15 r.6 RSC or commence his own proceedings, but the nature of the interest that the broker would assert in such circumstances has never been clarified by the courts. At all events I suspect that the observation of Diplock J. in Amalgamated General Finance Co. v. Golding [1964] 2 Lloyd's Rep. 162 at p.170 that a broker can put difficulties in the way of a claimant who tries to circumvent a broker's lien by recovering without production of the policy remains true.

"Although it has been doubted whether a lien on a policy gives a lien on the proceeds collected under it, where the broker is authorised to collect losses or returns of premiums his right to retain the sum for which he has a lien out of monies received by him under the policy has been expressly recognised and seems clearly established."

The doubt in question was expressed by Scrutton L.J. in Fairfield Shipping Co. v. Gardner, Mountain & Co. (1911) 104 L.T. 288. Despite that doubt, I consider that the conclusion expressed by the Editors of Arnould was well justified. As early as 1802, in Man v. Shiffner & Ellis (1802) 2 East 523, Lord Ellenborough CJ, when speaking of the position of a mercantile agent, said at p.530:

The defendants having had no notice that this policy was not for White and Lubbern [the party who employed them], they had a lien upon it for their general balance. They must be supposed to have made advances on the credit of the policy, which was allowed to remain in their hands. Therefore, they had a right to satisfy their general balance from the money received under the policy, whether before or after the notice communicated to them of the plaintiff's interest.

I hold that if a policy of insurance is effected by a broker, in ignorance that it does not belong to the persons by whom he is employed, he has a lien upon it for the amount of the balance which they owe him. In this case Clarkson has misconducted himself, and is liable for not disclosing that he was a mere agent in the transaction; but the defendants, who had every reason to believe that he was the principal, are entitled to hold the policy. If goods are sold by a factor in his own name, the purchaser has a right to set-off a debt due to him, in an action by the principal for the price of the goods. The factor may be liable to his employer for holding himself out as the principal; but that is not to prejudice the purchaser who bona fide dealt with him as the owner of the goods, and gave him credit in that capacity. The lien of the policy-broker rests on the same foundation. The only question is, whether he knew or had reason to believe that the person by whom he was employed was only an agent; and the party who seeks to deprive him of his lien must make out the affirmative.

Cahill v. Dawson (1857) 3 CBNS 106 was a case in which it was treated as axiomatic that a Broker had a lien over the proceeds of a policy of insurance in respect of the monies due on account from the agent who had placed the insurance, unless at the time that the indebtedness was incurred, the Broker was aware that the person placing the insurance was acting "merely as agent" for the assured.

Montagu v. Forward [1893] 2 QBD 350 was a case which involved no lien on the policy. By a chain of agents the assured instructed Lloyd's Brokers to collect on a policy. These Brokers were unaware that the agents from whom they received their instructions were acting other than as principals. It was held that, in these circumstances, the brokers were entitled to set off the proceeds that they had collected to discharge the agents' indebtedness to them. Bowen L.J. stated the governing principal thus at p.355:

The case is, in my judgment, governed by the principle of the decision in George v. Clagett , by the rules of common sense and justice, and I think also by the law of estoppel. The principle is not confined to the sale of goods. If A. employs B. as his agent to make any contract for him, or to receive money for him, and B. makes a contract with C., or employs C. as his agent, if B. is a person who would be reasonably supposed to be acting as a principal, and is not known or suspected by C. to be acting as an agent for any one, A. cannot make a demand against C. without the latter being entitled to stand in the same position as if B. had in fact been a principal. If A. has allowed his agent B. to appear in the character of a principal he must take the consequences.

This case is to be contrasted with Maspons Y Hermano v. Mildred (1882) 9 QBD 530; (1883) 8 AC 874. In that case merchants had placed insurance on instructions from an intermediary of the assured. After a casualty, the merchants collected on the policies, but sought to set off the proceeds against the indebtedness of the intermediary on account. It was common ground that the merchants were aware of the fact that the intermediary had acted as an agent when they collected under the policies, but they contended that they were ignorant of this and had thus acquired a lien over the policies when the insurance was placed, which they were entitled to transfer to the proceeds, notwithstanding their supervening knowledge of the agency. This plea failed, not because it was unsound in law, but because the Brokers were held to have been aware of the agency at the time that the policies were issued.

The importance of the lien on the policy is, thus, that it enables the Broker to maintain a set-off in respect of a receipt of claims proceeds notwithstanding that he has acquired knowledge of the existence of a previously undisclosed assured prior to the receipt, provided that he had no such knowledge when the lien on the policy arose. This demonstrates the fallacy in Mr Gilman's argument that the right of set-off in relation to proceeds is simply a feature of the law of agency and has no connection with the broker's lien on the policy. If the broker retains possession of the policy, discovery of the existence of a previously undisclosed principal will not defeat the accrued security

of the lien on the policy, or the commensurate right to set-off where a collection is made under the policy. If, however, the broker parts with possession of the policy and then discovers the existence of the undisclosed principal, he will have no continuing security, even if he recovers possession of the policy - see Near East Relief v. King, Chasseur & Co. [1930] 2 KB 30 at p.44.

As the brokers transact the chief part of the business, and generally pay the premiums, the law has given them a lien upon the policies in their hands, so as to enable them to deduct out of any monies they may receive for the assured, not only the premium and commission due on the particular policies, but the general balance due to them on the account between them and their principals.

In respect to the assured, the broker also has a lien on the policies in his hands for a general balance. A broker effected two policies and paid the premium on both. A loss took place on one of them. It was held that he had a lien for both premiums [Leeds v. Mercantile Ins. Co. 6 Wheat 565.]

The lien of the agent is not to be regarded merely as a right to retain the possession of the policy until his claims, constituting his lien, are satisfied. The obligation of the lien attaches equally on all moneys received by him under the policy; or, to speak more correctly, he has an immediate right to apply such moneys, so far as may be necessary, to the satisfaction of his debt.

In relation to insurance brokers. This class of agents, also, have now, by general usage, a lien upon the policies of insurance in their hands, procured by them for their principals, as also upon the moneys received by them upon such policies, not only for the amount of their commissions and the premiums for the particular policies, but also for the balance of their general insurance account with their employers. But the lien does not extend to cover any balance due upon business foreign to that of effecting policies of insurance, as the usage does not extend to such a claim; although, in many cases, it may be made available by way of set-off, and, in cases of bankruptcy, by way of mutual debt and mutual credit.

For these reasons I consider that the Judge erred in failing to recognise that a broker who has a lien over a policy of marine insurance is normally entitled, when he collects under the policy, to apply the proceeds collected in discharge of the debt that was protected by the lien. The precise basis of this right does not appear clearly from the authorities, but one can well understand that it should have become established as a matter of mercantile usage, for it is a natural adjunct of the lien on the policy. It was a normal part of the duty of a broker who remained in possession of the policy to collect the insurance proceeds and that duty would have been anomalous indeed if the act of collecting under the policy had destroyed the security afforded by the lien.

It is, of course, always possible for a broker to agree that he will not assert any claim over proceeds collected for an assured, and we were told by Mr Gaisman, Q.C., for the Brokers that such an undertaking is often sought by and given to a mortgagee. It is accepted by the Bank that it is not open to it to argue that the authority that it gave to the Brokers to collect the claim proceeds in the present case was subject to any such agreement. In these circumstances, I would hold that, if and insofar as the Brokers enjoyed a lien over the Policy as security for Colne Standby's indebtedness, they enjoyed a commensurate right to retain the proceeds that they collected in diminution of the indebtedness protected by that lien. This leads me to what I consider to be the most difficult issue raised by this appeal.

Where one of a number of persons who are individually interested in the subject matter of a marine adventure takes out insurance for the benefit of all, so that each has a right to sue in respect of his own interest, the insurance is known as composite insurance. The extent of the independence of the right of each assured to claim in respect of his own interest was recognised in Samuel v, Dumas [1924] A.C.431. Policies of composite insurance existed before the 1906 Act and were recognised by the Act. Thus S.8 provides that a partial interest of any kind is insurable, and S.14 provides:

A common form of composite insurance must have been a single policy taken out by a managing owner on a vessel owned in shares by a number of individuals. Under S.5 of the Merchant Shipping Act 1894 a ship is divided into 64 shares and part owners can have separate interests in a ship. Where the managing owner insures on behalf of all, all may be jointly liable for the premiums - see Robinson v. Gleadow (1835) 2 Bing N.C. 156 - but the insurance is nonetheless a composite insurance.

With one possible exception, none of the authorities deal directly with the nature of the lien enjoyed by a broker where one of a number of persons interested in a marine adventure insures both on his own behalf and on behalf of the other persons interested. That is the position in the present case.

Mr Gaisman submitted that the language of Section 53(2) makes the position clear and the fact that the situation with which we are concerned may have been without case precedent when the Act was passed is nothing to the point. In the present case, Colne Standby was the person with whom the Brokers "dealt" and who employed the Brokers when the insurance was placed. The Brokers dealt with Colne Standby "as a principal" - indeed Colne Standby was the principal party assured under the policy. At no time did the Brokers have "reason to believe that [Colne Stanby] was only an agent".

Mr Gilman submitted that the draftsman was addressing only the position where there is a single assured and a single employer. The Act simply fails to deal with the position of composite insurance. It is a general principle of law that where a composite insurance is taken out, the acts or omissions of one co-assured do not prejudice the position of the other co-assureds, who are treated as if they have independent policies. Precisely the same position should be adopted in the present case, so that the Bank cannot be prejudiced by the fact that Colne Standby has defaulted on its debts.

The absence of any decided case dealing with the point suggests that both before and after 1906 it has been taken for granted either that a general lien does arise in a case of composite insurance where the "employer" who places the insurance does so both on his own behalf and on behalf of co-assureds, or that it does not. We must, however, decide the point without evidence of usage. On that basis, my conclusions are as follows.

1. Section 53(2) does not apply to composite insurance. "where he has dealt with the person who employs him as a principal" is not appropriate language to describe dealings between a broker and an employer who places insurance both on his own behalf and on behalf of other interests. The latter part of the sub-section suggests to me that the draftsman was indeed, as Mr Gilman submitted, addressing only the simple position of one employer and one assured.

3. This principle was recognised in the context of marine insurance in the case of Maspons v. Mildred to which I have already referred. That case involved (1) foreign merchants, who were the plaintiffs, (2) shipping agents, bankers and importers called Demestre, who gave instructions to effect insurance of a cargo owned by the plaintiffs and (3) London merchants, to whom those instructions were given and to whom the cargo was consigned, who were the defendants. One of the questions asked of the jury was "on whose behalf and for whose benefit were the insurances effected?" The jury answered "for all parties whom it might concern". In the Court of Appeal Lindley L.J. remarked:

"The jury were, in our opinion, quite right in finding that the defendants effected the insurances for the benefit of all concerned - i.e., as it turns out, for the benefit of the plaintiffs and of Demestre & Co. and of the defendants, according to their respective interests in the cargo. The plaintiffs being the owners of the cargo, the insurance was, consequently, for the[ir] benefit, subject to the liens, if any, of Demestre & Co. and of the defendants, according to their respective interests in the cargo."

In the House of Lords Lord Blackburn held that the position was governed by the provisions of the Factors Act 1825 which provided that a consignee could have no lien over goods shipped in the name of a consignor if the consignee had notice that the consignor was not the actual and bona fide owner of such goods. As to this, Lord Blackburn said at pp. 885-6:

It is not necessary that there should be notice of the name of the person who has an interest, but only that there is a person having such an interest, or, as in the Spanish letter he is called, an interesado; that is enough to give the consignee notice that the consignor "is not the actual and bona fide owner of such goods", or rather of the whole interest in such goods. But so far as the consignor has an interest by way of lien or otherwise paramount to that of the interesado he is the actual owner, and the consignee has his lien.

It seems to me that this was, on analysis, a case of composite insurance. No general lien could be asserted by the Defendants in respect of Demestre's liability to them, save to the extent that Demestre had an interest in the policy by way of lien that was derived from and superior to the plaintiffs' title.

4. A case such as Maspons v. Mildred differs from one such as the present where a policy covers, not merely different interests in the same property, but a fleet of vessels where different interests may exist in each vessel. Nor is it appropriate to apply the Factors' Act in the present case, even by analogy. I am, however, in no doubt that the suggestion that an assured who places cover expressly both on his own behalf and on behalf of other interests, thereby subjects his co-assureds to the burden of a general lien in respect of his indebtedness to the brokers under a running insurance account is contrary to principle and unsupported by any authority.

For these reasons I have concluded that Section 53(2) of the 1906 Act did not confer a general lien over the Policies in favour of the Brokers in the present case, and thus that they derived no right to retain the proceeds collected on behalf of the Bank under those policies in diminution of the debts owed to them in respect of other insurance business placed by Colne Standby.

I would conclude with this general observation. Where, as is usual, a broker collects under the policy which he procured for the assured, the broker will normally have a right to set-off the monies received for a particular assured against any indebtedness of that assured. To this extent, if either market practice or contractual agreement places the broker in a position to insist on collecting under a policy, the broker will enjoy a degree of security. This case demonstrates, however, that in a case of composite insurance such security falls short of that which would be provided by a general lien over policy and proceeds.

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England and Wales Court of Appeal (Civil Division) Decisions

EIDE UK LTD and Another v. LOWNDES LAMBERT GROUP LTD and Another [1997] EWCA Civ 3005 (16th December, 1997)